Strong Q1 Results Don’t Shield US Banks from Trump’s Tariff Risks

• Bank of America Corporation and JPMorgan Chase & Co. delivered stellar first-quarter results, with a significant rebound in fee income playing a key role in this strong performance.

• Persistently high tariffs could erode the favourable outlook and trigger stagflation, negatively impacting the banks’ profitability. We believe these risks are not yet fully reflected in their earnings and valuations.

• Profitability erosion would be driven by higher deposit costs, subdued loan demand, and stalled fee income recovery due to declining asset valuations and reduced market activity.

• The two banks have seen credit deterioration, with net charge-offs exceeding pre-pandemic levels. Further declines are likely due to depleted consumer savings and a tightening labour market, though they have adequate capital buffers.

• We estimate that both banks could see a near 20% decline in earnings under a stagflationary scenario, offering no upside potential for investors. We advise reducing exposure to these stocks to mitigate downside risks.

Q1 Earnings Shine on Rebound in Fee Income

The two largest US consumer banks - Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM) - reported first-quarter earnings that exceeded market expectations. Net income rose by 10.8% for BAC and 9.1% for JPM, driven by broad-based revenue gains (Figure 1) and underpinned by the US economy growing at a moderate pace alongside a rebound in consumer and business activity during the first quarter.

Figure 1: Both banks reported broad-based growth across revenue segments

Net interest income (NII) for both banks rose modestly, supported by easing net interest margin (NIM) compression and the repricing of fixed-rate assets originated at significantly lower rates. The Federal Reserve’s rate cuts since last September have helped bring down deposit costs, enabling BAC to maintain a stable NIM at 1.99%. While JPM’s NIM declined by 13 basis points YoY, it has held relatively steady since 3Q24 (Figure 2). Lower interest rates also helped stimulate loan demand, with total loan balances increasing by 4.4% YoY for BAC and 3.5% YoY for JPM.

Figure 2: NIMs have remained relatively stable over recent quarters

Meanwhile, non-interest income increased by 9.6% YoY for BAC and 17.1% YoY for JPM. The strong rebound was driven by higher global wealth management fees supported by solid asset inflows, a pickup in investment banking revenue from deal closures, and a sharp rise in trading income fuelled by strong demand for derivatives amid heightened market volatility.

Tariffs stand to spoil favourable outlook for banks

First-quarter results were rather robust for the two largest US consumer banks. However, the reciprocal tariffs announced on 2 April came in far more aggressive than expected—both in scope and scale—suggesting a potential shift in the broader economic paradigm. That means the current profitability may not serve as a reliable proxy for future performance, as the full economic ramifications of the new tariffs have yet to be fully priced into market valuations.

With limited progress in tariff negotiations and Trump signalling his opposition to extending the current 90-day suspension, the risk of elevated tariffs well above 2024 levels has grown considerably. If reciprocal tariffs persist, the US economy may edge toward recession—or, in a more severe scenario, enter a period of stagflation, marked by stagnant growth and sustained inflation. That would exert significant pressure on bank profitability and credit quality.

Historically, the two largest US consumer banks have experienced strong deposit inflows during periods of economic recession (Figure 3). In 2020, amid the COVID-19 pandemic, combined deposits at BAC and JPM rose sharply at 31.4% YoY. This increase was primarily driven by a flight to safety, as investors and depositors reallocated capital from riskier investments and regional banks into large lenders that were viewed as 'too big to fail’.

Figure 3: Deposits could surge sharply during periods of crisis

Meanwhile, both banks are counting on the repricing of fixed-rate assets to support NII growth; however, this could be largely offset by softening loan demand—mirroring trends seen in 2009 and 2020, when loan growth turned negative. A prolonged period of elevated interest rates may also prompt early loan repayments, further eroding interest income. The resulting combination of strong deposit inflows and subdued lending activity could drive down the loan-to-deposit ratio, presenting a particularly challenging scenario for bank profitability.

At present, both banks have maintained their NII guidance and have priced in four 25-basis-point rate cuts for the year, with expectations for continued NII improvement. BAC, for instance, is projecting a 6% increase in NII, reaching USD 15.5 billion by 4Q25. However, this outlook hinges on tariff de-escalation and a continuous recovery in loan growth and market activity. Without these conditions, we believe the guidance may prove overly optimistic.

The rebound in fee-based revenue is likely to stall if tariffs persist and stagflation materialises. The strong rebound in global IPO activity earlier in the year has already begun to reverse, with volumes contracting by 7.8% YoY in April as investor confidence waned (Figure 4). This marks a sharp decline from the 20.3% growth recorded in the first quarter, prior to the escalation of tariff concerns. Similarly, asset and wealth management revenues are expected to decline in response to falling market valuations.

Figure 4: Global IPO activity turned negative on a YoY basis in April

Of all revenue-generating segments, trading may offer a relative bright spot. Heightened market volatility typically drives wider bid-ask spreads, increased transaction volumes, and stronger demand for hedging instruments and derivatives. However, given that trading revenue represents only a modest share of overall income, it will not fully offset declines across other major revenue streams.

Credit quality shows signs of cracks

The prolonged high-interest rate environment has led to a deterioration in the credit metrics of both banks. Net charge-offs have risen above pre-pandemic levels, with BAC at 0.54% and JPM at 0.74%. The majority of this increase stems from the consumer portfolio, particularly credit card losses. The extended period of elevated borrowing costs has drained US consumers' savings, as reflected by the decline in the personal savings rate, which fell to 3.9% of disposable income at the end of the first quarter—well below the 25-year historical average of 5.6%.

Figure 5: The financial cushion built by US consumers during COVID-19 has been depleted

The labour market is showing signs of cooling, although current data remains healthy, with the gap between job layoffs and vacancies still significantly larger than pre-pandemic levels (Figure 6). However, we believe that the second-order effects of tariffs will exacerbate this issue. Layoffs are already occurring in tariff-impacted industries, such as the automobile sector, with companies like Volkswagen and Nissan making headcount cuts. Should the current blanket reciprocal tariffs remain in place, broader layoffs may follow.

Figure 6: The US labour market is tightening but remains fundamentally healthy

The commercial sector continues to face pressure from commercial real estate (CRE) loans that originated at significantly lower interest rates. BAC began reducing its exposure to this segment in the second quarter of 2023. BAC's CRE exposure has decreased by 8.5% YoY, contributing to a 10 basis point decline in its commercial net charge-off rate for the first quarter of 2025. In contrast, JPM has maintained a relatively consistent level of exposure to CRE over the past few quarters. In a tariff environment, this positions BAC more favourably, with CRE loans making up just 5.9% of its total loan portfolio, nearly half of JPM’s 12.0%.

As a result, BAC has shown stronger credit risk management, evidenced by lower net charge-off rates and a more modest increase in provisions—up just 12.2% YoY. In contrast, JPM’s provision for credit losses surged 75.4% YoY in 1Q25, reflecting a heightened concern over potential credit deterioration.

Nonetheless, both banks' strong earnings have bolstered their capacity to absorb potential asset quality deterioration. JPM's robust profitability has enabled it to build the highest CET1 ratio among US banks, at 15.4%, 310 basis points above the regulatory requirement. BAC’s CET1 ratio stood at 11.8% at the end of 1Q25, 110 basis points above the required minimum.

Big Banks Face Potential Downside Risk to Valuations

While both banks are deemed 'too big to fail' and benefit from strong, diversified revenue streams and robust capital positions, their business models remain inherently cyclical. In a stagflation scenario, earnings could face substantial pressure, likely triggering a meaningful correction in valuations. For investors currently holding these stocks, we believe it is prudent to lock in profits and reduce exposure to mitigate potential downside risks.

As of 12 May 2025, BAC’s price-to-book (P/B) ratio stood at 1.2X, slightly above its 10-year average of 1.0X. JPM had a notably higher P/B ratio of 2.2X, well above its 10-year average of 1.5X and our assigned fair P/B multiple of 1.8X. This makes JPM's valuation more vulnerable to a correction, particularly in the face of macroeconomic challenges such as tariffs and stagflation.

Under our base case scenario of potential stagflation in the US, we estimate that BAC and JPM could see their 2025 earnings decline by 19.7% YoY and 21.4% YoY, respectively. Using a fair P/B multiple of 1.0x for BAC and 1.8x for JPM, we find that both banks' current share prices offer no upside after accounting for tariff risks. Our target price for BAC is USD 40.6, implying a downside of -6.4% (Table 1), while our target for JPM is USD 238.9, suggesting a larger potential downside of -8.1% (Table 2).

With large banks already facing potential downside risks, we expect even greater profitability pressure for smaller regional banks, which tend to have less diversified revenue streams, higher exposure to CRE loans, and more limited buffers to absorb losses. Unless Trump rolls back or significantly reduce the tariffs permanently, we believe the banking sector does not offer compelling investment opportunities given the current valuations.

Table 1: Our target price implies a downside of 6.4% for BAC

Bank of America (NYSE: BAC)
	FY24	FY25E	FY26E	FY27E
EPS	3.2	2.6	3.1	3.6
EPS Growth	4.8%	-19.7%	18.3%	16.6%
P/E Ratio (X)	13.36	16.63	14.06	12.06
Book Value/Share	37.1	37.5	38.8	41.1
P/B Ratio (X)	1.17	1.16	1.12	1.05
Target Price (USD)				40.6
Upside Potential				-6.4%
Source: iFAST Estimates Data as of 12 May 2025.

Table 2: Our target price indicates a downside of 8.1% for JPM

JPMorgan Chase & Co (NYSE: JPM)
	FY24	FY25E	FY26E	FY27E
EPS	19.8	15.5	17.0	17.8
EPS Growth	21.7%	-21.4%	9.7%	4.3%
P/E Ratio (X)	13.2	16.8	15.3	14.6
Book Value/Share	120	124	131	137
P/B Ratio (X)	2.17	2.10	1.98	1.90
Target Price (USD)				238.9
Upside Potential				-8.1%
Source: iFAST Estimates Data as of 12 May 2025.

Figure 7: BAC’s share price vs. EPS

Figure 8: JPM’s share price vs. EPS

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.